What the Iraq mess means for oil

What the Iraq mess means for oil

If it sat on the self-help shelf, a book describing the current spike in oil prices might be called “When Good Things Happen to Bad People.”

The collapse of Iraqi government authority in one of its two most important oil producing regions certainly will raise prices at the pump in the short-run in the Western world, but it’s an absolute godsend to the crooked characters who lord it over much of the world’s production.

As of 7 a.m. EST on Friday, Brent crude, the global benchmark based on the price of North Sea oil, was at a 2014 high of $113 a barrel.

Equally worrying from an oil price perspective is the fact that Kurdish irregulars took control of the second-most important oil city in the north, Kirkuk, in a sign that Kurdistan may finally have had enough of the corrupt and inept Shia-dominated central government in Baghdad.

Either way, the pre-crisis assumptions — that Iraq was volatile but making steady if erratic progress toward reclaiming its place as a reliable Top 5 oil producing state — is no longer “priced in” by oil traders.

In effect, the new price assumes Iraq’s supplies may or may not get to market, and thus global demand will have to be met by others who can charge more.

And that leads us to the “bad people.”

Smiles abound today in Russia, Venezuela, Iran and other OPEC outposts as a long period of low prices suddenly ends. The past three years, roughly equating to the period since the US withdrew from Iraq, have featured a return to the relative stability of the 1990s for global oil prices, if not the low dollar amounts. (Sorry folks, $20-a-barrel oil, a phenomenon that helped drive the Clinton-era US economy, ain’t coming back).

But after the invasion of Iraq took the country's important reserves off the market — coupled with soaring demand in China, India and other emerging markets — prices rose quickly, spiking at the start of the global financial crisis in 2009 at nearly $140 per barrel.

This was, literally, manna in the desert to petro-tyrannies.

A general rule of thumb is that the more likely you are to be arrested for speaking your mind freely, the higher the price of oil needed to buy social peace and break even each year.

While this isn’t entirely consistent, the estimates below — a mix of OPEC and private analysts' figures — indicate it’s not far off.

It’s fun to imagine what North Korea’s break-even price would be — indeed, if it produced oil.

One final thought: the price hike could turn out to be short-lived, as many are. Generally, oil spikes result in a “new normal” within two weeks as crisis turns to ugly new reality, or in rare cases, such as the first Gulf War, a period of relative stability.

Whatever OPEC ministers may think of Iraq’s travails — and they are of many minds — a major change awaits.

Talks on Iran’s nuclear ambitions still could result in a return of its enormous oil potential to the market, a development that would quickly calm demand-driven fears.

Add a slowdown in the BRICS and the ongoing surge in US production thanks to shale gas and tight oil, and Iraq’s problems look more and more like — well, Iraq’s problems. At least from an oil markets standpoint.